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To Do or Not to Do: Is It Safe to Tap into a Merchant Cash Advance?

Reputation is king. Yet Merchant Cash Advances can be confusing for many small retailers and merchants. Public opinion is torn between their business-saving and bottom-line threatening capabilities.

But come to think of it; this two-sided nature is a characteristic of all loan products. So the loan type isn’t always the problem; many other factors determine whether you benefit or plunge into bad debt.

The cash advance product, however, has remained a sticking point for many reasons.

  1. It has a confusing reputation
  2. The cash advance model is still unclear for many merchants
  3. It uses factor rates instead of interests
  4. Can be an expensive form of funding

Hopefully, this post will iron all these areas to help you make an informed decision.

What are MCAs?

A merchant cash advance is the lump sum a lending company gives to a borrowing business, repayable as a portion of its per-day revenue.

The MCA provider automatically deducts an agreed-upon portion (10 to 20%) of a business’s daily sales.

These deductions fluctuate with sales; you pay more during high sales and less when revenue dips. That also means a business with high per-day revenues will clear their debt faster.

Also, instead of interests, MCAs use the factor rate approach, which can be 20 to 50 percent of the advance amount. 

And though these short-period loans should be settled in months or less than a year, the FTC reports that MCAs steer towards three-digit Annual Percentage Rates (APRs), making them the most expensive funding product

The Bright of Side of MCA funding

So why would you want to consider a cash advance?

  1. On-the-spot funding to meet your urgent business needs
  2. No need for collateral 
  3. You enjoy funding even with credit scores under 600
  4. Relying on your business’s oncoming sales offers protection against failure to settle
  5. A simple loan request process with high acceptance rates

Lastly, this product is not considered a debt, so whatever happens with your MCA doesn’t show on your credit report.

The Dark Side of MCA funding

You may be well familiar with the benefits of cash advances, but what could ruin the cash-advance experience?

  1. It is probably the most expensive source with triple-digit APRs
  2. Expensive funding can force a business to refinance the cash advance by taking out a second MCA
  3. It depends entirely on automatic deductions from a business’s per-day revenue, meaning you can’t repay it using funds from another account.
  4. MCAs are scarcely regulated, and applicants are likely to meet different terms, fees, and practices from the various providers.

With so much at stake, you don’t want to enter an agreement before double-checking the offer.

The Verdict

MCAs can prove beneficial or disadvantageous to a business depending on the many factors highlighted in this post.

Business owners are advised to plan, seek financial advice, and have an expert scrutinize the contract thoroughly.